Is Gap Insurance Worth It? When You Need It and When to Skip

Imagine this: You buy a brand new car for $35,000. Three months later, you get into a terrible accident and the car is totaled. Your insurance company writes you a check for the car's current market value, which has already depreciated to $28,000. But your loan balance is still $34,000. Who pays the $6,000 difference? You do. Unless you have GAP insurance.

What is GAP Insurance?

GAP stands for Guaranteed Asset Protection. If your car is totaled or stolen, traditional auto insurance only pays out the Actual Cash Value (ACV) of the vehicle. If you owe the bank more than the car is worth (being "upside down" or having "negative equity"), GAP insurance pays the difference so you aren't left paying thousands of dollars for a car you no longer own.

When Do You ACTUALLY Need It?

GAP insurance is not legally required, and you do not always need it. You should seriously consider buying GAP insurance if:

• You put less than 20% down: Without a massive down payment, the car's immediate depreciation will drop its value far below your loan balance.
• You financed for 60 months or longer: A 72 or 84-month loan means you are paying off principal very slowly, maximizing the time you spend upside down.
• You rolled negative equity into the loan: If you traded in an old car that you still owed money on, you started your new loan deeply upside down.
• You leased the vehicle: Most leases actually require GAP insurance, and it is usually built directly into the lease contract automatically.

When Can You Skip It?

You can confidently decline GAP insurance if you put down 20% or more, if you are financing for 36 or 48 months, or if you bought a car that holds its value exceptionally well. In these scenarios, you likely have positive equity, meaning if the car is totaled, the insurance check will be more than enough to pay off the bank.

Where Should You Buy GAP Insurance?

Never blindly accept the GAP insurance offered by the dealership's finance manager. Dealerships routinely charge $600 to $1,000 for a GAP policy. Instead, call your primary auto insurance provider (Geico, State Farm, Progressive, etc.). Most insurance providers offer GAP coverage as an add-on to your standard policy for just $3 to $5 a month.